We gave them bailout funds last fall, but……..
Could we characterize the bailout as now being on steroids or should we just say that it is shifting gears? Whatever way we are to frame it, the bailout is now stealing the headlines again. Oh yeah, and then there is that stimulus deal.
Citibank is asking the government to shift their preferred stock holdings to common stock and take about a 25% ownership stake in the bank. (although it could be much more) The government currently holds $45 billion in preferred stock.
Does this begin to sound like nationalization? It is being denied, but come on. When the government is taking an ownership position in a bank; what else can you call it?
AIG needs more money. We haven’t talked about that firm in a while. According to a CNBC report, AIG is expected to report a $60 billion loss next week. The government has already invested $150 billion in the beleaguered insurer. Some speculate that the company will make a plea for more in order to avoid bankruptcy.
AIG was just one of the dominos in the mortgage crisis. Their heavy reliance on CDO’s (collateralized debt obligations) is what nearly led to their complete collapse. As we have discussed in earlier posts, the investments that were derived from mortgages have been the undoing of many financial companies.
A return to the bailout basics
The Capital Assistance Program is the newest component of the bailout and officially starts today. This is a return to the original bailout theme. I spoke of this a couple of posts back when I talked about the ‘stress test.’ Many banks are stressing out because of this new phase of TARP2.
This new program is a joint effort by the FDIC, Office of Treasury Supervision, Federal Reserve, Treasury Department and OCC. The program seeks to provide a ‘capital buffer’ for institutions that cannot obtain the funds through the private sector. The statement from the joint agencies says this; ‘Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government.’
The stress test will begin with 19 large banks that are experiencing balance sheet problems. Depending on the results of the stress test, the government would pressure those banks to exchange the preferred stock that the government already owns for shares of common stock.
As I said earlier, the move towards nationalization of the banking system, or at least portions thereof, appears to be in the works. The Fed Chairman refuted this notion when testifying the other day in front of the Senate Banking Committee. He could not guarantee that current shareholders would be safe.
Treasury also plans on March 4 to provide more details about a mortgage mitigation program it announced last week
March 2nd, 2009 at 8:02 pm
I wonder how much they will be publicizing these stress tests? Does a fail equate to an automatic exclusion from government funds? Somehow I doubt any of these guys will pass right now.
March 16th, 2009 at 3:20 am
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